Ad Revenue Mix Shift Hurting AOL Division's Profits

From Silicon Alley Insider: AOL’s ad revenue (TWX) was up 1% year over year–horrible, but, on the surface anyway, better than the cataclysmic -30% that was echoing around the Street a couple of weeks ago. That said, there is an important (and negative) business dynamic here that everyone should be aware of.

AOL’s third-party ad revenue (ad networks) grew, as did paid search. Display ads on AOL properties, meanwhile, declined.

The trouble here is that AOL’s third-party revenue is far less profitable than its owned-and-operated display revenue. This is in part why AOL’s EBITDA dropped so precipitously year over year despite the firing of about 2000 people. (The press release cites “higher traffic acquisition costs” as one reason for this. These are the revenue share payments that AOL pays out to the sites it sells ads for).

Also, the other strong point in the quarter’s ad revenue was paid search. The boost here is likely to be temporary. As Google gains more and more share of the search market, we expect AOL’s query share will gradually trend toward zero.

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